While homeownership has long been considered a part of the American dream, that dream has been getting harder and harder to achieve in recent years. This is especially true for the millennial generation. With high student loan debt and the rising cost of rent in metropolitan areas, America’s largest generation faces unique barriers to homeownership that are difficult to overcome.
But first-time home buyers in Florida have options that can make the dream of owning a home a lot more realistic. The US Federal Housing Administration (FHA) offers mortgages that are easier to qualify for, even if your income or credit score is low.
Florida FHA loans aren’t for everybody, but of the 1 million mortgages insured by the FHA in 2018, 83% of those were for first-time home buyers. So if you’ve been wondering how to make the leap from renting to owning your own property, you’re in the right place.
In this guide, we’ll go beyond what it takes to qualify. We’ll give you all of the information you need to decide if an FHA loan is the right lending option for you.
Benefits of an FHA Loan
FHA loans are appealing to first-time home buyers for many reasons, including:
– Lower Interest Rates: FHA borrowers can often get lower interest rates compared with conventional borrowers.
– Flexible Credit Requirements: Because the loan is backed by the federal government, lenders are able to have more flexible credit requirements – you can be approved with a score as low as 500.
– Smaller Down Payment: The average conventional loan requires a down payment of at least 20% – FHA loan down payments can be as low as 3.5%.
While there are many benefits, there are also a few downsides you’ll want to consider as well. For instance, FHA loans come with higher insurance premiums than conventional loans.
About Florida FHA Loans (& How Much You Can Borrow)
In response to the economic struggles of the Great Depression, the US government created the Federal Housing Administration (FHA) in 1934. The goal of this program was the same as it is today – to give low-income borrowers the opportunity to buy and own a home.
As a federally-insured program, applying and qualifying for an FHA loan doesn’t change much from state to state. There is, however, one major difference – the limit on how much you can borrow varies depending on where you live.
For example, in Hillsborough County, Florida, the FHA loan limit for a single-family home is capped at $314,827. In a more expensive area like Los Angeles County, California, borrowers can apply for loan amounts as high as $726,525 for a single-family home.
Why such a big difference? The lending limit for a particular area depends on the median home sale price. In Hillsborough County, the average home sells for around $221,000, while the average home in California sells for closer to $790,000.
To find out the FHA lending limit in your county, you can enter your state and county name into the official HUD FHA Mortgage Limit tool.
But no matter where you live, a lending limit is just that – a limit. Most first-time home buyers will not be able to borrow up to the full limit in their county. The amount you can qualify for depends on several different factors, including your annual income, debt-to-income ratio, and how much you’re able to put toward a down payment.
Online lending limit calculators aren’t always accurate, especially if your income is not consistent or non-traditional. Talk with a local mortgage professional to get the best idea of how much you can borrow.
How Do I Qualify for an FHA Loan?
While Florida FHA loans are popular among first-time home buyers, anyone can apply for this affordable mortgage option if they:
– Are at least 18 years of age or older
– Are able to show proof of income (pay stubs, tax returns)
– Plan to occupy the home as a primary residence
– Have a debt-to-income ratio of less than 50% (this may vary from lender to lender)
Whether or not you qualify for an FHA loan is more complex than a simple yes or no answer. Remember that while these loans are insured by the government, they are issued by private lenders. Individual lenders can have different lending requirements, mortgage rates, closing costs, and other fees, so be sure to do your homework to find an FHA-approved lender near you.
What About My Credit Score?
By now, you’re probably wondering: what credit score do I need to qualify for an FHA loan?
As we’ve mentioned, one of the benefits of a Florida FHA loan is that you can still qualify with a low credit score. However, your credit score still has a major impact on the type of loan you qualify for.
For example, with a credit score of 580 or higher, you can qualify for a down payment as low as 3.5%. Any lower than 580, and you’re looking at a down payment of around 10%. Either way, that’s still much lower than the average down payment for a home with a traditional mortgage, which is around 20%.
If your credit score is lower than 580, it’s well worth it to spend some time trying to improve your score before you apply for an FHA loan. Not only will you be able to qualify for a lower down payment, but you might also be able to qualify for lower interest rates depending on your lender.
How to Apply
1. Find a Lender
The first step in the process is the get in contact with a local FHA-approved lender. You can choose to work with a direct lender, such as a bank, or a private mortgage broker. Unlike a bank, mortgage brokers like those at Associates Home Loan of Florida have access to a large pool of lenders and loan programs to help you get the best outcome.
2. Get Pre-Approved.
While not a necessary step, getting pre-approved makes the application process go more smoothly and shows home sellers that you’re a serious buyer. Learn more about the mortgage pre-approval process here.
3. Complete the Application
To complete an FHA loan application, your lender will need:
– Your social security number
– Verification of employment (W2, paystubs)
– Tax returns
– Appraisal documentation
– A credit report on all borrowers
– Proof of past rent/mortgage payments
The complete documentation guidelines can be found on the official HUD website here.
Understanding the Real Cost of a Home
Just because it’s easier to qualify for an FHA loan than a traditional mortgage doesn’t mean that this type of mortgage is right for you. There’s a lot that you’ll want to consider before you apply, including insurance payments, closing costs, and additional fees.
If you put down less than 20% on a Florida FHA loan, you’ll be required to pay mortgage insurance.
There are two types of mortgage insurance premiums (MIPs) you’ll have to pay. The first is a one-time cost equal to 1.75% of your loan amount.
The second type of MIP is paid annually and is equal to 0.85% of your loan amount in most cases. Your annual MIP may be higher or lower depending on the length of your mortgage term. For instance, on a 30-year loan term, you may have to pay as much as 1.35% annually.
Mortgage insurance payments are expensive, and unfortunately a recent rule change is making sure they stay that way for the complete loan term. Prior to June 3, 2013, you could cancel your MIP payments once you met the following requirements:
– At least 22% equity in your home
– If you had a 30-year mortgage, you were paying it for at least 5 years (15-year mortgages did not have a 5-year minimum).
With these new rules, the only way to cancel your FHA MIP is by refinancing your mortgage into a conventional loan. This method offers additional benefits as well, including lower interest rates and overall better terms. You can learn more about FHA refinance here.
Fees are a necessary evil of any type of mortgage. FHA loan closing costs aren’t all that different from closing costs associated with conventional loans, but there are a few differences.
The upfront MIP payment equal to 1.75% of your loan mentioned earlier is an additional cost unique to FHA loans. Many borrowers choose to have the expense rolled into their total loan amount.
Altogether, the upfront MIP payment, administrative costs, application fees, and other loan-related costs can add up to between 3% and 6% of the home’s purchase price.
Because closing costs vary from lender to lender, you might want to shop around and get estimates from multiple lenders so that you can get the best rate possible. So long as it’s within a period of 30 days, having your credit pulled by multiple lenders will not hurt your score.
The Hidden Costs of Homeownership
When trying to decide if an FHA loan is right for them, many people make the mistake of only planning for loan-related expenses like insurance and closing costs. But first-time buyers should be aware the homeownership comes with its fair share of unexpected costs, such as:
– Property taxes: If you want to live in an area with nice public amenities, be prepared to pay higher property taxes. In the state of Florida, the median annual property tax is $1,773.00, or 0.97% of a property’s assessed market value.
– Maintenance and repair: Things like plumbing, landscaping, security systems, trash collection, and homeowner’s association fees can add up to thousands of dollars annually. A good rule of thumb is to set aside 1% of the value of your home for annual maintenance costs.
– Utility bills: You may be no stranger to paying utility bills for a rental property, but be prepared for your electric and water bills to be a bit higher when you move into a home.
Tips for Paying Your Down Payment
One of the most difficult parts of the mortgage application process for first-time buyers is coming up with enough money for a down payment. While FHA loans require much lower down payments than conventional mortgages, that 3.5% or 10% down can still be a big expense, especially for younger buyers who haven’t had time to grow their savings.
Luckily, the Department of Housing & Urban Development is somewhat flexible when it comes to acceptable down payment sources. In addition to money from a checking or savings account, you can also use:
– Cash on hand (as long as you provide a written explanation of how the cash was acquired)
– Stocks and bonds
– Retirement accounts
– Gifted funds
It’s not uncommon for parents, in-laws, and other relatives to gift down payment funds. As long as they don’t expect repayment, that money can be used to cover the entire down payment cost on an FHA loan.
Just because you can use a family gift to cover 100% of your down payment doesn’t mean that you should.
Remember, you’re going to be dealing with individual private lenders, not the government. If you don’t put any of your own money into a down payment, that’s a red flag telling potential lenders that you’re more likely to default. Even if you have generous family members, it’s still a good idea to practice smart saving habits so that you can contribute some of your own funds and potentially avoid paying mortgage insurance.
Is a Florida FHA Loan Right for You?
Buying a home is a life-changing decision that should be considered carefully. You don’t want to be one of the 63% of millennial homebuyers who have regrets about their home purchase because they did not fully understand all of the costs and fees that come with homeownership. Educating yourself about the homeownership process is the best thing you can do for your bottom line.
If you think that a Florida FHA loan could be the mortgage solution you’ve been looking for, contact Associates Home Loan of Florida, Inc., today to connect with a local lender.